Amazon.com Slides Despite a Solid Quarter

Amazon.com (AMZN Quote) beat its financial targets Tuesday evening, but investors fled the stock anyway.

The online retailer reported its third straight strong quarter, significantly topping Wall Street's financial targets. The company also unveiled a plan to treat stock options as an expense, a change that many shareholder rights advocates have long backed for all companies and one that high-profile outfits like Coke (KO Quote) have adopted to much fanfare in recent weeks.

But the stock, which lost over 6% on another tough day for the market, continued its slide in postclose trading. The setback came as investors continue to grapple with the question of whether stocks such as Amazon are too pricey to bring shareholders a decent return on their investment. After falling 95 cents to $14.55 during Tuesday's regular trading, the stock slid to $13.89 after the close.

"I think the shares are selling off because we are in an incredibly bad market," says Holly Gustafson, who covers the company for Legg Mason and has a long-term buy rating on the stock. "I don't think anyone can swim upstream in this deluge."

Solid Progress

The Seattle-based online retailer reported revenue of $806 million in the second quarter, better than the consensus estimate of $790 million, according to Thomson Financial/First Call. The company reported a net loss of $94 million, or 25 cents a share. In the year-ago period, Amazon lost $168 million, or 47 cents a share, on revenue of $668 million.

On the company's preferred pro-forma basis -- the one analysts still use for their estimates -- Amazon lost a penny share, a much smaller loss than the 6-cent Wall Street target. Amazon also raised its revenue guidance, saying it expects sales to rise more than 18% for the full year. Previously the company had forecast a 15% jump. For the third quarter, Amazon expects to generate between $780 million and $830 million in sales, compared with current expectations of about $785 million.

Even more important for investors is that Amazon's margins do not appear to have been hurt by price cutting. The company showed impressive growth in the sale of used merchandise, where Amazon receives a listing fee and a cut of the sale, but does not hold the inventory. Margins on these sales are believed to be slightly higher than regular sales, although the company does not release such figures. In the quarter, the number of units sold of used goods grew sequentially to 20% of all North American orders. Analysts had been expecting about 13%.

Margins were also clearly helped by distribution deals with Sony, Toshiba, Microsoft and Yamaha, management said on the conference call. The company's electronics business, while fast growing, still loses money and the company has had difficulty in the past convincing manufacturers to sell directly to Amazon.

But on the conference call, CEO Jeff Bezos said margins would decline in the third quarter due to the company's new policy of giving free shipping for all orders of at least $49. In the long term, he says, it would boost profitability as "increases in unit volume flow across our cost structure."

Amazon downplayed any worries of an ongoing price war with Buy.com, which recently announced it would undercut Amazon's book prices by at least 10% and offer free shipping. "We definitely consider ourselves the leader in this space, and we are pretty proactive in setting our own price structure," Bezos said. "In the first few weeks of the new quarter, we are pleased with the continued growth in book volume."

Performing

The solid report comes as Amazon has outperformed most of its rivals in the market. Long derided as a red ink-stained poster boy of the New Economy, Amazon turned its first-ever profit in the fourth quarter, and followed that up with another solid first quarter. Stockholders have been rewarded: Shares are still up over 30% on the year.

Seeking to further bolster its credibility, Amazon said it would begin expensing stock options in the beginning of 2003, a move likely to please corporate governance watchdogs. Many tech executives have resisted the move, saying such an expense appears only on paper and that recognizing it would unfairly penalize tech companies and their shareholders.

Management declined to give an estimate of how much the company's income statement would have been hurt had options been expensed in the second quarter, saying only the impact will be negative.